Property as a business not investment.

[tcocaro]

People,

I am currently 24 and I started investing 2 years ago and have since amassed;

1x property in Glenmore Park, Penrith
2x dual occupancy properties in Jerrabomberra, ACT
3x property in Jerrabomberra, ACT
2x property in Dunlop, ACT
2x property in Gungahlin, ACT
1x property in McKella, ACT

My investment strategy has evolved from looking for cash positive deals to deals where i put no money down to deals that just make overall business sense.

I now only build properties, keeping costs down and only purchase when total cost of building\land purchase is approximately 80% of valuation hence all the above properties are 80% of valuation i.e. avoiding LMI. I balance this with rental and projected capital growth but I am in desperate need for hard XYZ measures\rules so I do not make a mistake on a purchase but as you read on its hard to do this.

My general strategy is to buy and hold as many properties as I can and not sell anything. I use the equity in the properties to draw down and purchase businesses that produce an income and use this to fund the current and future interest repayments.

Businesses I have opened include mortgage brokering services, development & sales of construction and a cafe.

My question is! How many people here invest as above i.e. "trully" seing property as just an asset and have a strategy to buy which invovles more than just the typical notions of cash positive, negetive gearing.

My follow on quesiton is what system do you have in place to ensure that the right decision is made, balancing risk and conducting quick feasability study.

In addition what financial controls do you use currently I have someone doing my booking (MYOB) monthly for all my business interests including property (I currently buy property under my own name). I use optimist 3000 to conduct business models to see if purchasing property x over y makes sense.

Basically I am starting to struggle to know what my strategy is for example although I wish to purchase and not sell, selling a property or two may infact provide the immediate cash to allow me to purchase more properties and hence hold onto more than if I had never sold 1?

I am sorry for babbling but I want to know if anyone has an advanced investment strategy here and have enough properties to know that there is a point where a clear, systematic strategy is required for purchases and financial control.

Any help would be appreciated.

P.S I am not rich and hope the above question does not suggest that. Booking keeping costs less than $200 a month. I have been able to buy so many properties thanks to buying on valuation which means money down from my pocket is minimal. In short I have been able to purchase many with relatively little cash. My strategy works BUT and can continue to do so but i want a more conrete system in place and interested to hear from others in my or similar position.

Any help would be appreciated.

 

[The Y-man]

I am not rich

Holy heck! Well if you aren't now, I can see you will be (mega rich) in the future!

Can't help you much technically (holler for an Acey ) but I am sure there will be many here who can.

My first impressions are (without knowing all the facts)
. Don't expand too fast (know your limits)
. watch your total LVR and serviceability (interest cover).
. Protect your assets
. You may in fact need to sell down the property portfolio IF one (or more) of your businesses get into difficulties. Traditionally, there is a higher risk associated with SME's than with property (are they all residential?).

Cheers,

The Y-man

 

[The Y-man]

tcocaro,

You probably need to set some goals / long term visions on where you are heading. You have them somewhere in your head - articulate them and write them down.

Know where you want to be financially (net worth and income) 1 year, 5 years and 10 years from now.

What you are doing now becomes the mechanism of achieving those goals and visions.


I am just racking my brain to think of resources that might assist you in a wholistic sense, as there are many books on starting/running SME's, as there are on property investing: but I am not sure that I have ever come across a real combination of both (tends to be one after the other).

Cheers,

The Y-man

 

[skater]

My goodness, so much at such a young age. The only thing I can add is that you may need to change your strategy as far as holding entitys is concerned. This is only my opinion by the way, not advice, but see a good accountant and keep up the good work.

Cheers

 

[Nominees]

Hi tcocaro,

When I first saw the title I thought I would write a short note ... after reading your post it might be a bit longer.

The title said "Property as a business not investement".

I initially was going to say you must be very careful what you do here (however after reading your post I understand your intent and will discuss that later.).

If you are going into property as a business you can not claim the 50% discount on CGT ever (at least as I understand it). Only investement properties that are held for more than a year are allowed the CGT discount. So in most cases you will want your properties to be "investements".

I also noticed that all your properties are in your own name wich is not good.
You should at least have two entitites. One for "business" properties and the other for "investement" properties. The business proeprties are generally "build and sell" or "renovate and sell" and are kept for less than a year, and the investement ones are those that are kept (conveniently) for more than a year...

If you mix business and investement properties together the ATO will say that they are all business properties regardless, and stop you from claiming the 50% discount on your investement properties.

You should seriously start thinking about having a company- trust structure. (Dale and Nick are better qualified than I am to advise you on this.)

Now let me try and answer what you have asked. The real bottom line for me is "cashflow". I have some spreadsheets that do some fancy analysis but at the end of the day you must be able to put food on your plate AND pay your mortgages.

Having a business aside from property investing is actually a very good idea since it provides cashflow.

So when you have enough equity and cashflow to buy a property start looking for something neutrally geared that will have good capital growth.

This subject can be treated in great depth, but let's keep it simple ... "Cash flow" is king!

Cheers,

Nom

 

[wbthom]

Hi tcocaro,


I also noticed that all your properties are in your own name wich is not good.

You should seriously start thinking about having a company- trust structure. (Dale and Nick are better qualified than I am to advise you on this.)


Cheers,

Nom

tcocaro

As mentioned by nominee above you are extremely vulnerable with this arrangement. If there is a problem that results in a lawsuit not covered by insurance then you could easily lose the lot. Asset protection is more than making sure you have liability insurance - asset protection is making sure you can't be attacked in the first place. It may be too expensive to transfer current assets into an asset protected structure such as a trustee company/trust but you should at least put a structure in place for future safety.

Bill

 

[quoll]

tcocaro

I think, you will find that a good accountant with property knowledge will be able to help you set up a structure for your business. My advice would be to hold you property in a trust (your choice what type) that will distribute profit to a company. The company can then pay you a salary. The company will purchase lots of stuff, cars, computers, book keeping, etc.

You can expand on this and have multiple trusts that each hold 6 properties, but the more complex you become the more expensive your accountants bill is to do your tax.

I've got a mate who had a chat to a lawyer who works for a builder / developer and this is similar to the advice he was given. My account suggested a similar structure, and I think some of the members on this forum have similar structures. It was covered in a previous post a while ago.

The structure is important because it helps to insulate you from legal action, protect your assets and it helps to filter cash so you can pay the minimum tax you are required to pay, tax minimisation, not tax avoidance.

I agree cashflow is KING.

cheers
quoll

 

[Ronulas]

Totally amazed

Please excuse me for being so forward........but


What the hell do you do for a living?

At 24 years of age you would barely have had enough time to complete Uni or start a business, let alone buy all these expensive properties in Canberra ect.

I live in Jerrabomberra so I should know.

If you started investing 2 years ago then you obviously have made some incredible capital gains and so could draw down on the equity for more purchases but how did you get started?

You mentioned that you look for cashflow positive properties. Where would you have found those in places like Jerrabomberra? This is a fairly new suburb and prices have been fairly high. Not likely to achieve positive cashflow.

How did you get the bank to finance someone so young?
What did you use for deposits?

Please excuse me for asking personal questions but i'm 32 and nowhere near to doing what you claim to have done. Admitadly I am married with 4 kids (sort of slows you down a bit ;-), still that is a remarkable achievment the telling of which I would love to hear.

 

[TomL]

Please excuse me for being so forward........but

What the hell do you do for a living?

I'm guessing the business provides some cashflow .. and the style of deals allow continuing purchases.

Quote - "My investment strategy has evolved from looking for cash positive deals to deals where i put no money down to deals that just make overall business sense. "


I guess I know how you would have voted in the recent "is it the right time to buy now" style of polls !!

It all comes down to strategy and execution.

This is gonna be a great thread - I can feel it in me bones, I cant wait for comments from some regulars.

 

[Ronulas]

Yeah - Sorry I re-read his post after I asked the question, but it still does not answer the question. How did he start?

Purchasing businesses takes money. The bank will only lend %80.

Do you really believe that at 22 years of age (possibly only 4 years out of high school) you could save enough money for deposits on houses ?

Of course parents/relatives could help. This is an incredible achievment that I personally would like to hear.

I've read his past posts and they do mention building in the ACT, so assuming he's legit, there is a great story here.

P.S. Don't think I'm knocking him. If it's real, kudos for him.

 

[WillG]

"My question is! How many people here invest as above i.e. "trully" seing property as just an asset and have a strategy to buy which invovles more than just the typical notions of cash positive, negetive gearing."


I can't speak for other forumites but I treat each of my IP's as indvidual business's. They have growth, cashflow and a management team to keep the cashflow rolling in. I set a projected capital growth and rental growth I expect to achieve from the properties and update the real growth

"what financial controls do you use currently"

I use a series of spreadsheets to keep track of current investments and model future investments against my entire portfolio and againt my investment goals.

You keep on asking for a concrete systematic strategy for purchasing and financial control. I assume you are asking for a system outputs details of the next property you need to purchase that will help you meet your investment goals.

May I ask what your goals are (besides accumulating as many properties as possible) ? How do you define 'acceptable risk' ?

 

[Pete]

tcocaro,

My two cents worth.

Think about your "big picture" strategy. What you are aiming to achieve, how and by when. Learn as much as you can about all elements.

This forum is one of the best resources. Read lots of old posts. Especially in the "investor psychology" and "accounting and tax" sections. Learn about the best ownership structure.

Learn from successful investors. Communicate with other motivated, successful people.

I've learnt a lot from many books; perhaps some of those will help you. Excellent books such as

- Rich Dad Poor Dad's "Guide to Investing"
- books on trusts. Such as Renton
- Jim McKnight's "Ordinary Millionaires" might be helpful
- Rory O'Rourkes "Born Free Taxed to Death" might help
- those by Jan Somers
- those by Peter Spann

Basically though, you have to work out your strategy. It is not quick and it is not easy; it doesn't happen overnight. However, give it some thought and, with time, a strategy that suits you will develop. It will change as your circumstances, knowledge, goals, wealth, etc change.

Asking on the forum will help with some good information from others but it is really up to you.

Personally, I model in Excel both my long term and short term plans. This modeling forces/requires a clear understanding of your strategy - you can't model it unless it is defined somehow. I build in some sensitivity measures to see "what if" as things change.

The short term modelling of cashflow has been my most valuable tool, especially in earlier days when I was starting off and expanding. It can be done fairly simply. This monitoring is less critical day to day now as I keep a healthy reserve of funds in a LOC. Having the model let me know at all times that I could cover future commitments and determine capacity for further purchases. This confidence is important.

I believe the absolutely best risk management - aside from learning and applying that knowledge - is to keep dedicated funds spare and available.

By learning as much as you can and forming a clearer strategy, the confident successful application of that knowledge will follow.

I'm expert in using Excel; if you want any help in setting up some spreadsheets please PM me.

regards,

 

[Aceyducey]

I see our properties as stock rather than individual businesses.

Overall it's sort of a leasing company with assets that appreciate

Cheers,

Aceyducey

 

[Pete]

tcocaro,

Some thoughts further to my message yesterday.

With development of your strategy, you'll know what investment indicators are best for you.

Such as, if capital growth is most critical, you'll measure the appropriateness / feasibility of an investment based on capital growth indicators.

Or if rental yield is paramount, then your strategy will optimise and measure yields.

If your biggest risk is cashflow, then maybe determine that you have x months' worth of repayments available, or y% of your debt. Maybe include an indicator of vacancy rates if that is a significant risk.

Another thought, bookkeeping is a recording & reporting tool as distinct from controlling of costs. To control costs the actual costs might be compared to a baseline / original budget or maybe used for forecasting (which can include variations of varying levels of likelihood). Bookkeeping alone may not be enough. Also, graphs for me are really valuable.

For example, I plot my cashflow for the next 12 months or so. Seeing the balance going up is comforting! I also plot a longer term strategy with a sensitivity to capital growth - by adjusting a sliding control in Excel the modelled varying growth rates are reflected in a chart of future portfolio value, debt & equity.

Also, I project my end of year figures based on year to date figures. So by April when three quarters of the tax year has passed, I have a quite accurate forecast of end of year figures. (Even very early in the tax year I have a reasonable feel for the numbers as rental income and expenses are fairly predictable for my properties.)

By using Excel, I have found it possible to model anything I can dream up. It is very worthwhile to me.

regards,

 

[XBenX]

Loads of limiting beliefs and skeptics here.

Nice work tcocaro! Sounds like you have achieved plenty!

Its easy to come on here and bs about whatever you would like - I prefer to take things at face value until I have a reason to think otherwise.

I dont view my property purchases as a business - IP purchases are my backup plan - they will fund my retirement if other investments do not.

 

[WillG]

Loads of limiting beliefs and skeptics here.

Nice work tcocaro! Sounds like you have achieved plenty!

Its easy to come on here and bs about whatever you would like - I prefer to take things at face value until I have a reason to think otherwise.

I dont view my property purchases as a business - IP purchases are my backup plan - they will fund my retirement if other investments do not.

'limiting beliefs and skeptics' Can you expand on this ?

Can you expand on what other investments besides IP's will fund your retirement ?

Cheers

 

[Aceyducey]

WillG,

Limiting beliefs are those where people focus on the can'ts - can't be possible, can't be right, can't be true, etc.

It normally starts when protecting individuals from harm, often in childhood (ever remember your parents saying you can do something) that gets internalised & breeds an attitude where people limit themselves to areas they 'can' and never see larger opportunities.

To give you a personal example:

I'm not a geologist & have no experience working for an oil exploration company. In fact I'd never invested in an oil stock two years ago!

Based on that it'd be easy to say that I can't start an oil exploration company. It'd be totally ridiculous!

However I was interested in energy last year, learnt a lot about the area from specialists and have a very good grounding in founding and operating businesses (plus some experience in raising capital.

When the opportunity fell into my lap at the start of this year to participate in the start-up of an oil exploration company - because I put myself in the right place by saying can - I took it (despite all the people saying can't).

The first company I got involved with goes to a public listing early 2005 - and this is after some MAJOR challenges it has had to face this year, which I've commented on elsewhere in the forum. With a can't do attitude the company would have folded (luckily we made sure we put can do people in charge!)

I've started my second oil exploration company, which has successfully raised funds and is now in the process of securing exploration land. It has a group of very supportive shareholders involved plus a number of people who want to invest in the next stage.

If I'd said can't do this - I have no experience, I'm not a geologist, etc, I wouldn't have recognised the opportunities or been able to execute them.

BTW - I'm also looking at setting up a publishing business in the next year with some of the most experienced and skilled editors in Australia. Now this is an area where I have a little experience, but I'm sure I'll encounter plenty of can'ters!


Personally I have no doubt that tcocaro could have achieved what he has claimed. Whether he actually did or not is between him & his conscience - I'm sure he will slip up if he's telling a porker, and I'm happy to give him the benefit of the doubt as I might learn something.

Now - what would it say about tcocaro if I said that I can't believe what he has achieved?
Nothing at all - his success or not is unaffected by my attitude!

What does it say about ME if I say that I can't believe his achievement?
A LOT!! If my ego compells me to limit others, how could it be similarly limiting me?

Challenge your assumptions!

Cheers,

Aceyducey

 

[Corsa]

Hi Tcocaro

Firstly, congratulations on what can only be described as a fantastic acheivement. I thought all day of how/if I could respond to this post because of the challenge that it imposes, very few have done what you have done so quickly and in such a diverse way with your businesses etc.

There are many more on this forum who operate businesses and invest significantly in property and are more equipped to answer this post than me. I have not done much of these things but I thought I would respond to your questions with my thoughts as follows in any case.

I now only build properties, keeping costs down and only purchase when total cost of building\land purchase is approximately 80% of valuation hence all the above properties are 80% of valuation i.e. avoiding LMI. I balance this with rental and projected capital growth but I am in desperate need for hard XYZ measures\rules so I do not make a mistake on a purchase but as you read on its hard to do this.

There is always going to be risk associated with any purchase and you will make mistakes (evenutally, you have only been going for 2 years), however as you point out, understanding the hard xyz measures/rules that work for you to manage this risk is what is going to be important from here on out.

My general strategy is to buy and hold as many properties as I can and not sell anything. I use the equity in the properties to draw down and purchase businesses that produce an income and use this to fund the current and future interest repayments.

Fundamentally this is the best strategy, as you can afford another property you buy one and you keep as long as you can hold. As far as you saying further down that you need to further develop this strategy, I would focus on the big picture, what are you setting out to acheive. Work out what the next 10 years holds for you and track yourself against the acheivement of these goals.

My question is! How many people here invest as above i.e. "trully" seing property as just an asset and have a strategy to buy which invovles more than just the typical notions of cash positive, negetive gearing.

Depends on what you mean by typical? When I purchase a new property now I look at:
Gross Yield
Net Yield
Return on Investment Yr1
IRR (Internal Rate of Return)
NPV (Net Present Value)

All these financial ratios must be in the right direction before I proceed with a purchase, from here on out all capital has to be performing to maximise the return in addition to analysing the cost of holding in terms of the overall portfolio.

My follow on quesiton is what system do you have in place to ensure that the right decision is made, balancing risk and conducting quick feasability study.

As above, look at the financial ratios for the new property in addition to your overall portfolio and assess whether you are still heading in the right direction. How are you managing interest rate risk? Interest rate risk can be managed by saving at least a 1% interest rate rise on your monthly repayment in addition to working out what a 20% cut in lifestyle and any excess income after costs that you have to offset the interest rate impact. Fixing some of your rates?

In addition what financial controls do you use currently I have someone doing my booking (MYOB) monthly for all my business interests including property (I currently buy property under my own name). I use optimist 3000 to conduct business models to see if purchasing property x over y makes sense.

I use MYOB currently and have purchased all in my own name. As a PAYG earner, I have now exhausted all my tax benefits of holding the properties. Only now am I seeking to explore the use of Trusts and Companies etc to further maximise my tax situation. If you are in a mortgage broking, developing businesses plus cafe, I would be seeking to separate some of these affairs so that you reduce the risk of being sued should this occur. Not a day goes by effectively where I dont log onto MYOB to analyse my bottom line and the profitability of each MYOB job. I am sure "outsourcing" your bookwork this makes sense but if I were you I would be burying myself in the numbers so that you can fully appreciate them. My thoughts are this will help you work out profitable deals quicker once you do this. I am not familiar with Optimist 3000, is this development software? In any case, fully understand the tax outcomes of your decisions in addition the impact of new purchases on your portfolio. Continue to invest with your gut feeling, it is almost always right.

Basically I am starting to struggle to know what my strategy is for example although I wish to purchase and not sell, selling a property or two may infact provide the immediate cash to allow me to purchase more properties and hence hold onto more than if I had never sold 1?

I would seek to understand what are the star performers of the portfolio and the dogs. With the dogs, sell immediately. If you are running out of cash and need to sell, then this will be a neccessary step in any case. You dont want your plans to run out as a result of lack of capital. I would also understand the true cost of capital so that you can look at more innovative ways to fund new deals if your equity in your current portfolio is slowing down. This can involve 80% traditional finance, 20% on credit as an example but still an overall profitable deal.

I am sorry for babbling but I want to know if anyone has an advanced investment strategy here and have enough properties to know that there is a point where a clear, systematic strategy is required for purchases and financial control.

You have 11 properties, I only have 8 but I can say that over the last 4 purchases I have become very mindful of the bottom line, return on capital, and more innovative when it comes to financing only as I have found as you get bigger the whole thing could become a run away train and potentially unravel which should not happen.

P.S I am not rich and hope the above question does not suggest that. Booking keeping costs less than $200 a month. I have been able to buy so many properties thanks to buying on valuation which means money down from my pocket is minimal. In short I have been able to purchase many with relatively little cash. My strategy works BUT and can continue to do so but i want a more conrete system in place and interested to hear from others in my or similar position.

Some people say that ANYONE could have made a fortune over the past few years because of the property boom, which is technically true (even thought we know not everyone has/will) but you have had a lot of luck and economic fare on yourside so far. You have also had the mindset, determination, and focus and faith in order to acheive what you have so far. Now you need to put the controls in place to focus your efforts on managing the overall portfolio as a whole, maximising your potential for income and capital return, as well as managing the risks associated with economic downturns and less favourable economic conditions like interest rate risk and inflation etc.

All the best, I am sure you will be very successful in all your future endevours.

Kind regards

Corsa

 

[Corsa]

Do you really believe that at 22 years of age (possibly only 4 years out of high school) you could save enough money for deposits on houses ?

Of course parents/relatives could help. This is an incredible achievment that I personally would like to hear

Hi Ronulas

I know you are not knocking Tcocoro, however you are giving us an insight into what XBenX has described as "limiting beliefs". I know what Tcocoro has done is possible as I have done something similar but on a smaller scale. Started with nothing but the first couple of properties had great capital growth that enabled the "leapfrogging" to occur and capitalising on that.

I didnt assume that Tcocoro's parents or friends gave him a "headstart", althought using whatever leverage is necessary is still a good strategy in order to get to where you need to be. Tcocoro has done what some young men in there twenties do, take big risks often and early and he has capitalised on this in a rising market. In your situation, it is not to late, you just need to think outside the square you live in.

All the best

Corsa

 

[Ronulas]

Limiting Beliefs

As you Corsa and Acey have pointed out, nothing is impossible. Just sometmes seems impropbable. My "limiting beliefs" as you put it, comes from that improbability.

I guess you have picked my character pretty well. I can admit to having trouble thinking out side the box at times which cause my "limiting beliefs". I recognise this in myself and can only say that I am working on it. I could blame that on my upbringing but..... I have come too far in my own development to accept that.

This whole conversation from my point of view was one of trying to learn. I have only asked Tcocoro to tell his story. I think that at his age, in this day and age he has made remarkable progress. So far he has not responded, which is fine as his business is his business.

I like to hear success stories, they keep me in faith.

I live in Jerrabomberra, so would be interested in hearing why and how he managed to invest there.
As I stated in earlier posts, I have read through all Tcocoro's previous posts and he seems to know what he is talking about. I do not really doubt his sincerity, I just would like to know how he has accomplished all this in such a short time

Tcocoro,

If your watching, please do not take offence at my original tone of disbelief. Take it as a tone of amazement. I would like to hear your story, thats all.

Regards